Growth Determinants of Small Enterprises (SEs) in Sri Lanka: A Comparison of Sales and Employee Growth Models 1

Transcription

1 Growth Determinants of Small Enterprises (SEs) in Sri Lanka: A Comparison of Sales and Employee Growth Models 1 B Nishantha Abstract Small enterprise growth is very important for the economic growth of any by researchers in various disciplines, an integrated analysis is still lacking. This paper attempts to provide two integrated growth models: sales growth external resources and internal capabilities. By conducting an empirical study to growth measured by sales and employee growth. The results broadly support resource sharing with SEs have a substantial impact on sales and employee important factor in SE growth. Finally, as an internal capability, innovation and imitation are found to have a positive impact on sales and employee growth. Key words: Sri Lanka Dr. B Nishantha is a Faculty Member at the Department of Management & Organization Studies of the University of Colombo, Sri Lanka. nishantha@fmf.cmb.ac.lk 1 An earlier version of this paper was presented at the 7 th International Research Conference on th December 2011 at the University of Colombo, Colombo, Sri Lanka

2 Sri Lankan Journal of Management Vol. 19, Nos. 1 & 2, January - June, 2014 Introduction and economic output in developed and developing countries. It is a common phenomenon that causes many SEs to close their doors within a short period of time. Among the operating SEs, some grow rapidly while others lag behind or grow only and small enterprise growth. Most of the growth studies relate to one of a number The main purpose of this study is to propose and test two comprehensive multidimensional integrated models of small enterprise growth, namely, the sales growth model and employee growth model, in order to understand the factors contribution of variables associated with Human Capital, Social Capital, Internal Capabilities and Business Structure and Access to External Resources for Growth of identify the important growth determinants, which can possibly explain the growth The article proceeds as follows: After establishing a theoretical framework for the study and reviewing prior empirical work in the area, the research method is implications, limitations conclusions. Literature Review In this section we review the literature relevant to each of the research dimensions used in this paper. Then the method is outlined. The section which describes the measures is followed by the results and discussion section of the two growth models. section contains concluding remarks

3 Small Enterprise Growth Small enterprise growth is a research area that has attracted considerable attention in growth suggest that little is still known about the phenomenon, and conceptual seems to be that the majority of them consider only a single perspective and a small portion of the variables that are pertinent to growth literature. The growth of small convergence of owner-manager factors, internal factors, and external factors impact upon the growth of small enterprises. The abilities and motivations of ownermanagers and their actions to address issues related to these factors determine the direction and performance of small enterprises. The resource-based perspective has established its position in one of the most increasing attention in the past years. More recently, the emphasis has turned from identifying the resources needed for obtaining a competitive advantage to empirically explaining the relationships and links between resources and enterprise growth. Another commonly utilized approach to enterprise growth is through the and its industry environment that can explain a major proportion of the observed variations in business growth rates. There are many studies in this genre, with researchers typically applying multivariate techniques to large cross-sectional data the growth rates of small businesses. of theoretical perspectives or dimensions to derive hypotheses for empirical testing. It limits the ability to see the big picture. To overcome this limitation, it is necessary to empirically combine primary perspectives or dimensions to develop a comprehensive model of small enterprise growth that is integrative and broad in scope and parsimonious in nature. As the purpose of this research is to build integrative growth models of small enterprise growth, the researcher focused on four research dimensions, namely, human capital, social capital, access to external

4 Sri Lankan Journal of Management Vol. 19, Nos. 1 & 2, January - June, 2014 resources and internal capabilities and business structure as the basis of this model. components and small enterprise growth. Human Capital (HC) and Small Enterprise Growth knowledge with varying degrees of transferability. Human capital is comprised of relevant education, employment experience and other types of experiences such as assists them in identifying opportunities and knowledge of ways to more effectively education and work experience can be regarded as surrogate measures of general human capital while variables relating to prior ownership experience can be regarded individuals without such experience. Most of the previous researchers who examined the impact of human capital on the However, it is important to understand the indirect effect of human capital variables example, human capital is essential for social capital development and may affect enterprise growth through social capital. As suggested by Jørgensen and Ulhøi prerequisite for membership and networks broaden opportunities for innovation by increasing the geographical environment in which learning and social interaction can take place. Social capital (SC) and Small Enterprises Growth embedded within, available through, and derived from the network of relationships

5 Owner-managers networks help to mobilize additional resources, attract customers, and identify entrepreneurial opportunities since social relations mediate economic Much of the existing literature on the network form of social capital has focused on maintain and develop network relationships. In addition, as in human capital, most researchers have examined only the direct effect of social capital on enterprise growth. Owner-managers social capital may enhance small enterprise growth indirectly also by providing more opportunities to access resources and by improving internal noted the ability of social capital to enhance an individual s access to information and reassurance necessary to exploit such growth opportunities. Access to External Resources (AER) and Small Enterprise Growth capital, inability to hire reliable employees, and too much competition. enterprise growth. For various reasons ranging from a lack of collateral to bias can also be hindered by credit constraints that curb investments in the maintenance and labour are also crucial to small enterprises as attested to by research on small businesses in Turkey, which revealed that inability to attract and retain reliable hindering small enterprise growth

6 Sri Lankan Journal of Management Vol. 19, Nos. 1 & 2, January - June, 2014 Internal Capabilities, Business Structure and Small Enterprise Growth the physical asset base in terms of age, quality of machinery and equipment. A few studies have focused their empirical investigations into internal capabilities and structure that impact small business growth. A study by using Swedish data that young small enterprises are more likely to show high rates of growth compared The legal form of the business is another important internal variable that affects proprietorship, partnership and limited liability company. Among these different forms, the limited liability form is more formal and it frees the owners from some types of liability in regard to business operations. Small enterprises that are run in Product and process innovations may contribute to small enterprise growth. Further must be based primarily on innovation rather than on price. For example, Zahra the customer base in current markets or attracting new customers by opening new

7 Figure 1: A Hypothetical Model of Growth of SEs The conceptual framework of SE growth was developed on the basis of key insights Based on the extensive literature review and proposed hypothetical framework we developed the following hypotheses to gain an understanding of the determinants of small enterprise growth in Sri Lanka. Hypothesis 1: Human capital is positively related to social capital. Hypothesis 2 a: Human capital is positively related to access to external resources. Hypothesis 2b: Social capital is positively related to access to external resources. Hypothesis 3a: Human capital is positively related to internal capabilities and business structure. Hypothesis 3b: Social capital is positively related to internal capabilities and business structure. Hypothesis 3c: Access to external resources is positively related to internal capabilities and business structure. growth

8 Sri Lankan Journal of Management Vol. 19, Nos. 1 & 2, January - June, 2014 Methodology In this section we describe the sample, data collection procedures, measurement of variables and the data analysis method used in the study. Sample and Data Collection The unit of analysis for this study is small enterprises from Colombo district, Sri and from country to country. For the purpose of this study, a small enterprise is Data for this study was gathered through a survey questionnaire. The questionnaire a primary draft questionnaire, a pilot test was conducted with 10 entrepreneurs, using the feedback from the pilot study. The data was collected through personal interviews by contacting each organization and seeking permission to collect data. One hundred entrepreneurs were interviewed with a questionnaire for this study. Three questionnaires were rejected in the process of data editing. Finally 97 questionnaires were used for the data analysis. Operational Measures of the Variables In this section we describe the items used in measuring the variables in our study: Human Capital received, family background and skill level of employees. Based on these indicators, 19 variables were used to measure the human capital dimension of SE-owner managers

9 Social Capital Each measure of social capital employed in this study was derived from surveys in which owners were prompted to describe their ego-centred social networks. There family members, relatives and close friends. Organizational networks consist of both large and small enterprises, while supporting networks include supporting agencies such as banks, government agencies, and non-government organizations. entrepreneur was interacting with the above mentioned network members during the past six-month period to secure the business information and resources that respondents were asked to identify each network size. SE owners share different and market information, raw material supply, consulting, subcontracting and other received by owners from their networks and another eight dummy variables to measure resources given to the networks in the last six months. To measure the commitment of respondents to the maintenance of network relationships among SE owners, we used the following four indicators: average number of annual cards sent per year, average number of s sent per month to network members, average number of meetings and number of associations which the entrepreneur has taken membership of. Access to External Resources raw materials, availability of employees, availability of market, and the level of competition. was measured with respect to the availability of

10 Sri Lankan Journal of Management Vol. 19, Nos. 1 & 2, January - June, 2014 Access to Credit Information: Access to Raw Materials: Access to market: agencies, in addition to that, the respondents were asked to identify their focused market segments at the startup year, year 2007 and The variable incorporates the market expansion variable. The current market segments of the business were compared with the market segments in year 2007 and in the start-up year. It is a dummy variable that takes the value 1 if the owner-manager has entered the new market segments. Market Competition: The respondents were asked to identify a number of SEs directly competing with the respondents were asked to identify a number of large businesses directly competing with the businesses. Employee Availability: employees

11 Internal Capabilities & Business Structure and imitations, capacity utilization, number of products produced, introduction of family workers. Based on these indicators, 39 variables were used to measure the internal capabilities and business structure of sample SMEs. Innovations and Imitations: approach where innovation counts are based on the likes of patent statistics. As Sri Lanka is a developing country, the market for patents is in its infancy. In this survey the approach which was adopted to measure innovations and imitations is Respondents were asked to indicate whether they had introduced a novel innovation, the entrepreneur s business and also new to the industry while an incremental industry. Capacity Utilization: could be produced per day? Number of products and introduction of new products: in numbers. Small Enterprise Growth SE growth was measured by using two indices, namely, Sales Growth Index and

12 Sri Lankan Journal of Management Vol. 19, Nos. 1 & 2, January - June, 2014 Variable Employee Growth Index 2 EMP2010 EMP2009 *100 EMP2009 Sales Growth Index SALES SALES SALES Notes: EMP 2010 represent number of employees engaged in 2010 EMP2009 represent number of employees engaged in 2009 SALES2010 represent sales in 2010 SALES 2009 represent sales in 2009 Source: Author * 100 Data analysis method The statistical plan involved three main processes: factor analysis, step-wise multiple regression analysis and path analysis. Factor analysis was used to determine the number of factors associated with HC, SC, AER and IC & BS and it is one of the most widely used multivariate statistical procedures 3 in applied research endeavours Results and Discussion of the sample by using descriptive statistics. The second section analyzes the factor Sample Characteristics them were females. Their ages ranged from twenty-two to eighty. The majority of 2 This metric is frequently employed in research on SEs primarily because using employment levels is believed to yield the most accurate and comparable data. SE owners are typically able to remember enterprise growth is seen to reduce unemployment. 3 such a manner as to maximize the percentage of the total variance attributed to each successive factor

13 Principle Component Analysis The results of the principle component analysis for the four research dimensions are shown in Table 3. All the factors or components had Eigen values of greater than one. The results showed all of the items to have high loadings on their factors. A total of 18 variables in the Human Capital dimension created seven principle resources dimension had 17 initial variables for factor analysis which produced six representative factors. Our last research dimension was internal capabilities and business structure dimension and they represented 21 variables. Five factors were extracted from them. Table 3: Summary of principle component analysis results Component Communality Factor loading Human Capital Dimension Received training Cumulative variance explained

14 Sri Lankan Journal of Management Vol. 19, Nos. 1 & 2, January - June, Experience as government employee Number of years experience as government employee 3. Formal education 3. Technical knowledge from self-learning Technical knowledge from self-learning Father is an entrepreneur Family tradition Professional education Technical College education Received training Social Capital Dimension MA) 1. Size of organizational network 2. Number of annual cards sent per year Subcontracts received from large businesses 2. Average number of telephone calls given per week Total network size Number of s sent per week 1. Raw materials received from SEs Market information received from SEs Market information given to SEs Number of s sent per week 1. Consultancy received from government Technology received from government 1. Market information received from government Size of social network Consultancy given to friends Consultancy received from friends

15 1. Number of s sent per week Size of supportive network Access to External Resources Dimension 1. From banks Use of credit Loan information from supportive organizations 1. Employee availability Availability of raw materials 3. Finance availability Number of new suppliers 2. Number of suppliers Market expansion Selling to government agencies Internal Capabilities and Business Structure Dimension Number of imitations 2. Market and marketing imitation Process innovation 8. Product imitation 7. Supply relation imitation EMI) 1. Bonus Money advance

16 Sri Lankan Journal of Management Vol. 19, Nos. 1 & 2, January - June, Partnership Sole proprietorship Lunch/breakfast Market and marketing innovations Number of innovations Number of new products introduced 1. Number of new machines introduced Introduction of new machines 3. Number of new products introduced Sales Growth Model enterprises. The overall regression model for investigating the relationship among sales growth, human capital, social capital, access to external resources and internal suggesting that 70.5 percent of the variance of sales growth is explained by our used to interpret the causal relationship in Figure 2. showed that there is no direct effect but certain human capital variables, namely, education, education with experience in government sector, self-learning with sales growth via certain variables in social capital, access to external resources and internal capabilities and business structure. Especially, training with experience in the same sales growth via organizational networks with network maintenance and innovations and imitations (TE 4 =0.449). It implies the importance of industry-related experience and knowledge for the success of prior work experience may, in fact be more important than formal education in that

17 such training not only familiarizes the potential entrepreneur with processes and organizational functions but also involves the individual in a network with suppliers Technical and professional education and education with experience in the government sector also had a positive indirect effect on sales growth via organizational networks with network maintenance. It achieve high sales growth. In the case of social capital, three variables, namely, organizational networks with network maintenance, resource sharing with SEs and supportive networks with organizational network with network maintenance was found to be strong for sales relations with small and large enterprises. No doubt, resources are very important for any kind of enterprise. Small enterprises in particular are handicapped by a lack of resources. Sharing excess resources with other enterprises paves the way for overcoming the lack of resources problem in small enterprises. As in the study by achieving high growth. The results showed that three index variables of access to the external resources dimension have direct effects on sales growth, namely, competition from large and small enterprises, access to inputs and access to credit and credit information. that access to credit and credit information had a negative impact on sales growth. It may be due to the majority of the owner-managers who borrow money from lending organizations have invested that money on idle assets and those assets have been a business structure of sales growth showed that only one variable, namely, innovation and imitation and imitations attract customers to the businesses. Similar results were found in the

18 Sri Lankan Journal of Management Vol. 19, Nos. 1 & 2, January - June, 2014 our sample are more oriented towards imitations than innovations. Employee Growth Model capital, access to external resources and internal capabilities and business structure on employee growth, showed that certain variables of each research dimension have effects on employee growth. The overall model of the employee growth is shown in Figure 3. The overall regression model for investigating the relationship among employee growth, human capital, social capital, access to external resources and internal the most important variables affecting employee growth. In the case of human capital the research showed that training with work experience had both direct and indirect effects on employee growth. As shown in Figure 3, has a positive effect on employee growth via innovation and imitations. It implies that owner-managers with and imitations. Innovation and imitations enhance employee growth. The research found that technical and professional education had indirect effects on employee growth via access to inputs and organizational networks with network maintenance, a number of products with employee incentives. highlights that when owner-managers of SEs develop their human capital through technical and professional education such human capital facilitates employee growth by enhancing social capital access to external resources and internal capabilities. As a human capital variable education with experience in the government sector has an indirect effect on employee growth through variables in social capital (organizational network with network maintenance), variables in access to external resources (competition from large and small enterprises) and variables in internal

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20 Sri Lankan Journal of Management Vol. 19, Nos. 1 & 2, January - June, 2014 Table 4: The Decomposition of Effects of the Sales Growth model into Direct and Indirect Effects Independent Variables Human Capital Dimension Training with work experience in (X 11 ) Technical and professional education (X 17 ) Education with experience in government sector (X 12 ) Description of Paths (from to) Direct Effect Indirect Effect Total Effect Self-learning with work experience in 22 (X 14 ) Family tradition (X 15 ) Social Capital Dimension Organizational network with network maintenance (X 21 ) Resource sharing with SMEs (X 22 ) institutes (X 25 ) Access to External Redources Competition from large and small enterprises (X 35 ) Access to inputs (X 32 ) Access to credit and credit infor (X 31 ) Internal Capabilities & B.Structure Innovations and imitations (X 41 )

21 capabilities and business structure (innovation and imitations, number of products with employee incentives). The next human capital variable, self-learning with work experience in different also has an indirect effect on employee growth via the social capital-related variable, namely, resource sharing with SEs. In addition to the above mentioned four human capital variables, family tradition has an indirect effect on employee growth via the social capital variable, namely, resource sharing with SEs. The possible explanation could be that SE owner-managers who have come from entrepreneurial families may have long-term relationships with enterprises of similar size and those relationships may lead to sharing resources with other enterprises in their organizational networks. growth showed that three social capital variables, namely, organizational networks with network maintenance, resource sharing with SEs and a supportive network had direct effects on employee growth. Based on a other entrepreneurs in networks, such as Rotary Clubs, has a positive effect on the employment the business founder generates. The negative effect of supportive negative impact does not necessarily mean that institutes a relatively higher possibility of receiving loans from them. Such owner-managers take loans to purchase machines and they have substituted machines for labor inputs. It leads to decreasing employee growth. In addition to the direct effects, four variables namely, organizational networks with network maintenance, resource sharing with SEs, government supportive activities and sharing consultancy with social networks have indirect effects on employee growth via number of products with employee incentives. In the case of access to external resources we found that only access to inputs has a direct positive total effect on employee growth. Four variables, namely, competition from large and small enterprises, access to inputs, capital sources with credit from have an indirect effect on employee

22 Sri Lankan Journal of Management Vol. 19, Nos. 1 & 2, January - June, 2014 growth through number of products with employee incentives. As shown in Figure 3, competition from large and small enterprises has a negative effect on innovation and imitations. This result might be due to the defensive behavior of SE ownermanagers in Sri Lanka, for example, when competition increases owner-managers prefer to face the competition by reducing price rather than focusing on innovation and imitations. Figure 3 presents the internal capabilities and business structure variables which have a relatively greater positive total effect on employee growth. Two variables, namely, innovation and imitations and number of products with employee incentives have Number of products with employee incentives factor comprises four variables, namely, number of products, bonus, importance of employee incentives in attracting and retaining employees. Previous Comparison of two growth models Among the seven initial indexed variables of human capital dimension, only one indexed variable, namely, has a substantial positive total effect on both dependent variables: sales growth and employee growth. Moreover, another two human capital variables (technical and professional education and education with experience in the government sector) increase sales growth moderately but their positive effect on employee growth is each growth measure are not similar. The study further indicates that human capital variables such as have only a minimal effect on small enterprise growth. variables namely, organizational network with network maintenance, resources have above the moderate level total effects on sales and employee growth. It is interesting to note that while has positive total effect on sales growth, it has negative total effect on employee growth. As we discussed earlier, borrow money and substitute machines for labour

23 access to inputs has a moderate positive total effect on sales and employee growth. Competition from large and small enterprises also has only a minimal effect on sales and employee growth. It is interesting to note that while competition from large and small enterprises has a positive effect on sales growth it has a negative effect on employee growth. Contrary to our expectation, access to credit and credit information has a negative total effect on sales growth. and supplier availability increase employee growth but their total effect sizes are minimal. In the case of the internal capabilities and business structure dimension, we found that innovation and imitation have a moderate positive total effect on sales growth and a substantial positive total effect on employee growth. Implications for Theory and Practice The study shows a few important implications for owner-managers of Sri Lankan small enterprises. Participating in training programmes and starting enterprises with of the entrepreneurs. Owner-managers with such human capital are more likely to sustainable growth. The study highlights the importance of organizational networks and network maintenance, resource sharing with SEs and supportive network with managers of small enterprises in Sri Lanka can achieve higher growth by following different forms of innovations and imitations such as product, process, work practice, marketing and supply relations. This can be realized by strengthening existing contacts with organizational networks and enhancing human capital through training and experience. Collaboration with business support institutions and other organizations can serve to acquire the expertise and services that is currently lacking in the industry

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25 Table 05: The Decomposition of Effects of the Employee Growth Model into Direct and Indirect Effect Independent Variables Description of Paths (from to) Direct Effect Indirect Effect Total Effect (X 11 ) Technical and professional education (X 17 ) Education with experience in government sector (X 12 ) Self-learning with work experience in a (X 14 ) Family tradition (X 15 ) Organizational network with network maintenance (X 21 ) Resource sharing with SMEs (X 22 ) Government supportive activities (X 23 ) Sharing consultancy with social networks (X 24 ) Supportive netowrk with Financial institutes (X 25 ) Competition from large and small enterprises 35 (X 35 ) 35 Access to inputs (X 32 ) Capital sources with credit from FCs (X 33 ) 33 Supplier avilability (X 34 ) Innovation and imitations (X 41 ) No. of prod. with employee incentives (X 42 )

26 Sri Lankan Journal of Management Vol. 19, Nos. 1 & 2, January - June, 2014 The researcher observed that most of the owner-managers who borrowed money money in idle assets and they are paying high interest on their loans. This research suggests that owner-managers of SEs should recognize the multiple dimensions that affect enterprise growth. Firms growth is to a certain extent growth. Implications for Policy Makers and Supportive Organizations several of which may be useful for those who intend to provide assistance and support to small enterprises in Sri Lanka. First, this study points towards assistance measures aimed at promoting human capital formation. Government can introduce policies aimed at improving the knowledge and skills of individuals. Policy measures to develop human capital could include skills training, mechanisms for self-learning and encouragement of industry sectors. Specially from the SE point of view the following reforms on skills-related training courses at tertiary education level for school-leavers. Second, the study highlights the importance of subcontracting relationships between large and small enterprises. Obviously sub-contracting, by its very nature, is a mechanism which ought to help both parties to the arrangement, and the distribution are playing a vital role in promoting subcontract activities among large and small enterprises. For example, the Japanese government has conducted a series of SME

27 managerial practice and technology, cooperative organizations, modernization process of developing sub-contracting practices is yet in its infancy, the government has to take necessary steps to promote the subcontracting concept among large and small enterprises. Third, this research shows the positive effect of training with work experience in with SEs, access to inputs and innovation and imitations on both sales and employee growth of SEs. This underscores the importance of investing in human capital, encouraging networking, and focusing on innovation and imitations in Sri Lankan SEs for enhancing their growth. Thus, policy-makers are advised to consider these strategy for developing the SE sector. In particular, SE development programme designers and implementers can use our integrated causal models to understand how the intervention works to achieve small enterprise growth in Sri Lanka. Importantly, capital, social capital, access to external resources and internal capabilities and business structure. Limitations of the Study and Directions for Future Research This study has several limitations. Firstly, focusing on manufacturing enterprises limits the scope of the study. Secondly, the focus on small enterprises renders the growth. Another limitation is related to the cross-sectional nature of the study. Even though this study combines both survey data and secondary data collected at different times, the nature of the study is essentially cross sectional. This design limits the received theories and empirical research, thus improving the validity of the results

28 Sri Lankan Journal of Management Vol. 19, Nos. 1 & 2, January - June, 2014 These limitations suggest areas for future research. Research is needed to compare the growth factors of small manufacturing enterprises with service-oriented enterprises of the economy. Future research is needed to focus on small enterprises in other districts in Sri Lanka. Additionally, research on medium and large enterprises in this line of research would be to investigate the relationship between human capital, social capital, access to external resources, internal capabilities and business potential moderators. Future research using qualitative and longitudinal methods, Conclusion In this study we have examined the relationship between human capital, social capital, access to external resources, internal capabilities and business structure integrate those different dimensions to explain small enterprise growth implying owner-managers of small enterprises and small enterprises support agencies. The growth. Social capital variables seem to be more powerful predictors of sales and employee growth. In particular, organizational networks with network maintenance has a relatively greater positive effect on both growth measures. In addition to that, resource sharing with SEs also could contribute to the growth of SEs. In the case of internal capability substantially contributes to the growth of SEs. References Promotion of Local Private Sector in Moneragala District: Problems and Prospects. Study for MONDEF Research Project of the Development Studies Institute, University of Colombo

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